Van Eck Global, the New York-based money manager known for its
natural resources strategies, filed regulatory paperwork saying the
previously announced exchange of six exchange-traded HOLDRS
securities into Market Vectors ETFs will take place in the fourth
Company officials, who declined to comment on how many of the
existing HOLDRS investors might accept Van Eckâs exchange offer,
first announced the plan on Aug. 12. The HOLDRS involved, which
together have $3.30 billion in assets, will retain their existing
trading symbols. The specific securities and their respective
assets under management as of Sept. 29 are:
- Oil Services HOLDRS (NYSEArca:OIH), $1.82 billion
- Semiconductor HOLDRS (NYSEArca:SMH), $531.5 million
- Pharmaceutical HOLDRS (NYSEArca:PPH), $492.3 million
- Biotech HOLDRS (NYSEArca:BBH), $243 million
- Retail HOLDRS (NYSEArca:RTH), $140.5 million
- Regional Bank HOLDRS (NYSEArca:RKH), $72.0 million
The plan is the latest sign that the ETF juggernaut is gathering
steam. As of Thursday, Sept. 29, almost $1 trillion was allocated
to various ETFs, with asset growth in recent years outpacing
inflows into any other vehicle, as investors become more familiar
with the benefits of the ETF structure.
HOLDRS, on the other hand, have had their day. The funds, which
are holding company depositary receipts Merrill Lynch launched in
the late 1990s and early 2000s, are narrowly focused portfolios
that, once created, never changed. That set-and-forget aspect has
made them increasingly irrelevant given that holdings of ETFs
evolve with their respective indexes.
âOne of the main advantages of ETFs over HOLDRS is that they
allow the underlying constituents to change or be added over
time,â Van Eckâs principal Jan van Eck said in a conference
call, adding that an ETF basket also adds diversification to the
exposure, not to mention tax benefits.
Still, as noted, the six HOLDRS involved have combined assets of
$3.3 billionâa significant amount that could generate material
profits for Van Eck should investors widely accept the exchange
Taxes And Expense Ratios
Perhaps the most crucial piece of information Van Eck did reveal
today in a conference call with journalists and on its website was
the percentage of each of the involved portfolios that will have to
be sold in the rebalancings that will occur in connection with the
The percentages of each of the HOLDRS holdings that will have to
be soldâas of todayâin the upcoming rebalancings are:
- OIH, 28.21 percent
- SMH, 43.43 percent
- PPH, 52.6 percent
- BBH, 63.51 percent
- RCH, 26.11 percent
- RKH, 76.17 percent
Any capital gains associated with the sales of the stocks will
have to be paid by shareholders, company officials said.
As previously disclosed, the company said the new ETFs will each
have a 0.35 percent annual expense ratio. That works out to be more
than what Merrill Lynch, the sponsor of the HOLDRS, has been
charging, Van Eck officials said on the conference call. Those
expense ratios will remain in place until at least May 1, 2013,
Merrill said in a filing in August that the remaining 11 HOLDRS
not involved in the Van Eck exchange are likely to be shut.
Investors will be able to choose whether to take the exchange
offer or not, although Van Eck doesnât anticipate many will
bypass the transactions.
Still, if an investor takes no action at all, once the exchange
offer expires and the HOLDRS Trusts are terminated, they might not
have any way of selling receipts in any of these HOLDRS, and they
will be subject to whatever language is in the original HOLDRS
In effect, the unclaimed underlying securities in the HOLDRS
would likely be sold in what Van Eck called a âwind-downâ
period of four months from the termination date, and investors who
did not switch to the ETF structure would face a taxable event.
âInvestors have to affirmatively choose to take the offer,â
van Eck said.
But an investor can also opt to sell the HOLDRS on the open
marketâless of a tax advantage than taking the ETF, Van Eck
They could even cancel the HOLDRS and receive the unbundled
underlying shares they were invested in, Van Eckâs managing
director Adam Phillips said in the phone call.
âInvestors will not bear any fees, but may be subject to fees
from intermediaries,â Phillips said.
Custodial fees may also apply if investors choose to cancel
their participation in the HOLDRS, or they may need to pay
brokerage fees if they do so through the secondary market, he
Van Eck stressed in a press release and in the call that
investors should consult their financial and tax advisors.
But for the time being, no action is needed. Van Eck said it
expects to provide further information on the exchange offer
sometime in November.
Options In The Balance
Van Eck also said that the options market surrounding some of
the HOLDRs was fairly liquid, a fact that could pose some
challenges to those holding them.
âWe believe the exchange offers may have implications for some
HOLDRs options investors,â Phillips said in the call, adding
thatâs particularly true for those who hold options expiring
after the exchange offers end.
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